On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What is the cost of the hedge?
A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360

Question

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore) Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What is the cost of the hedge?

Assume that the transaction qualifies as a cash-flow hedge.What is the cost of the hedge?
A)$ 1,800 
B)$ 2,200 
C)$ 4,960 
D)$12,360

Quizplus · Accepted Answer

To calculate the cost of the hedge, we need to find the difference between the spot rate and the forward rate on the day the forward contract was entered into.

Forward rate on March 1, 20X2 = $1 SGD = $1 SGD 
Spot rate on March 1, 20X2 = $1 SGD = $0.80 AUD

The difference between the two rates is ($1 SGD - $0.80 AUD = $0.20 AUD).

The hedge is for $400,000 SGD, which is equivalent to $320,000 AUD ($400,000 SGD x $0.80 AUD/SGD).

Therefore, the cost of the hedge is $320,000 AUD x 0.62% (0.0062) = $1,984 AUD, which is equivalent to $4,960 SGD ($1,984 AUD / $0.40 SGD/AUD).

Thus, the answer is C ($4,960).